Integrated reporting: the new rulebook

Integrated reporting: the new rulebook Redefining the bottom line

“Too time-consuming,” “too costly,” “my investors only care about profits.” The reasons some executives come up with when asked about their thoughts on the integrated report are endless. If I had a rupee for every time I heard one of those…

Let’s be real: public sentiment towards business practices has become distrusting to say the least. Nothing eludes today’s savvy, more-connected-than-ever consumers. Their political opinion, innermost feelings or a photo of their dinner are bared online, for all to see. Withholding information or “alternative facts” are no longer viable options in a time where cynicism is the default setting through which many view the world.

Integrated Reporting’s goal is simple: to provide meaningful and transparent information to investors.

Corporate reporting is no different. The business world is at a crossroads where information is the crux of markets, yet it lacks clarity. A study on Intangible Asset Market Value found that in 1975, S&P 500 companies assessed 83% of their total value to derive from their material assets; today, that number is as low as 16%. What do the remaining 84% represent? Intangible factors. Trust, brand equity, innovation, customer loyalty and governance are the sustainable value drivers and hallmark of today’s economy. Consider this: Facebook bought WhatsApp for $19 billion, of which $15.3 billion was earmarked for – wait for it – goodwill. In other words, an intangible asset that represents WhatsApp’s potential future value.

In 1975, the annual report as we know it was, indeed, the perfect document to capture companies’ major concerns: financial and manufactured capital. Today, if you combine increasing concerns about climate change, political instability, social inequality, and the importance of human capital – you realize that the annual report loses sight of what matters to today’s investors. The current framework communicates information in silos, with no link between different elements of the value creation story. For instance, a company could have to make certain short-term sacrifices to gain profit in the long-term – these trade-offs are not reflected in financial statements. It fails to link business strategy and risk. Above all, it is overly complex and long. It just doesn’t cut it. The answer isn’t to abolish the annual report; let’s call it a reboot.

Integrated Reporting (IR) puts to rest the clamour of voices about corporate reporting opacity. Its goal is simple: to provide meaningful and transparent information to investors. Not more, just better.

The business world is at a crossroads where information is the crux of markets, yet it lacks clarity.

Developed by the International Integrated Reporting Council (IIRC), IR explains the dependencies and connectedness between the six capitals: financial, manufactured, human, intellectual, social and natural. Presenting financial alongside non-financial information allows shareholders, customers and employees to understand how these factors impact long-term and sustainable value. What stakeholders see is the unravelling of a holistic story: the effect of the company’s decisions on the community it operates in, its impact on the environment, how many jobs it created. These are what make a company resilient. And these are what inspire greater trust and eventually, create value.

IR has certainly gained momentum globally and is reshaping corporate reporting. Over 1,500 global businesses have adopted its principles. In Mauritius, only about a dozen listed companies have made the switch. So why aren’t they all using it, since it is the obvious step to take?

Because such a novel concept requires time to delve into the complexity of the framework, the participation of all internal resources, a move away from figures, and wide-ranging change. The report is only a milestone in the continuous journey known as “Integrated Thinking.” You cannot articulate the value story without questioning and reassessing how you work across departments. Integrated thinking breaks down functional silos and brings together people from all departments to understand how all aspects of the business – internal and external – are connected. Embedding this shared understanding makes the connectivity of information flow naturally into decision-making and the communication with stakeholders more effective.

This shift is taking place alongside the adoption of the New Code of Corporate Governance in Mauritius, mandatory as from 2018. Its goal? To enhance the quality of information provided by listed companies to investors – which also happens to be IR’s ethos. Rather than the rigid tick-the-box “Comply or Explain” methodology, companies must now “Apply and Explain”, an approach which requires astuteness, the ability to step back, gather internal resources and offer a clear explanation of how a company has applied each principle of the New Code. This combination goes beyond compliance, beyond the letter of the law, beyond reporting.

To choose the Integrated Report is to choose a business model that enables a change in behaviour. It is the product of a company that has taken the time to bridge the gaps between strategy, governance and performance. It shows commitment. Now, it’s time for everyone to follow.

Belinda Wong heads Rogers Capital’s Corporate Advisory department. She is a fervent advocate of corporate ethics and financial transparency and assists her clients in building up trust with their investors, may they be individual or institutional stakeholders.